The Looming Rentcropper Society

In addition to the problems mentioned in Institutional Home Buying Bubble (see post below) there are few other reasonable concerns about the programs that facilitate such institutional bulk purchases.

In addition to the operational difficulties, the operational overhead, and the lack of ‘scalability’ in the bulk ownership and the property management of single family homes – which are presumably geographically disbursed - some commenters have mentioned a few other un-intended negative consequences which might flow from federal government sponsored, and large bank sponsored, programs for the bulk sale of Real Estate Owned (REO) and foreclosed single family properties.  To read about some of the other (somewhat predictable) unintended negative consequences of the bulk sales of single family homes to institutional owners read the articles named and hyperlinked below.

Resources:
Our Coming Rentcropper Society By Yves Smith posted on NakedCapitalism 8/21/2012, at: http://www.nakedcapitalism.com/2012/08/our-coming-rentcropper-society.html#Td4eh6HzCh0JProP.99

Our Coming Rentcropper Society: Private Equity Firms Buying-up Blocks of Foreclosures Nationwide By HiPointDem posted on DemocraticUnderground 8/24/2012, at: http://www.democraticunderground.com/10021191182

Foreclosure Bulk Sales Program Allows Banks and Hedgefunds to Buy Low After Selling High By David Dayen posted on FDL March 21, 2012, at: http://news.firedoglake.com/2012/03/21/foreclosure-bulk-sales-program-allows-banks-and-hedge-funds-to-buy-low-after-selling-high/

FHA Moving Forward with Bulk REO Sales By Greg Fielding from 8/27/2012 post on Bay Area Real Estate Trends, at: http://bayarearealestatetrends.com/2012/08/27/fhfa-moving-forward-with-bulk-reo-sales/

Smoke, Mirrors and The Shadow Inventory

The Wall Street Journal “Smart Money” Will Short Sales Hit Home Prices?  By Anna Maria Andriotis - pub. August 22, 2012

 Why is there a ‘shadow inventory’ of homes?

  

In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced.  So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.

 

But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).

 

By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what  their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.

  

Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)

 

*  See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting

 

Federal Regulators Don't Want To Know


The Undisclosed Inventory of Homes

My comment on the article, Foreclosure Machines Still Running on ‘Low’  By Robbie Whelan in The Wall Street Journal [Developments Blog] – pub. July 31, 2012 at: http://blogs.wsj.com/developments/2012/07/31/foreclosure-machines-still-running-on-low/?blog_id=36&post_id=21215

The shadow inventory and the large inventory of bank ‘Real Estate Owned’ (REO’s) is a phenomenon which I believe has been caused to a significant extent by the decision to delay the implementation of FAS #157 [commonly known as ‘fair value accounting’ or ‘mark-to-market accounting’].

The delay in the implementation of mark-to-market accounting allows mortgage investors to report (on books and records) the value of their mortgage investments at the investment’s origination value rather than requiring these assets be valued at an estimate of current market value. See article, Congress Helped Banks Defang Key Rule By Susan Pulliam & Tom McGinty - pub. Wall Street Journal June 3, 2009 | at: http://online.wsj.com/article_email/SB124396078596677535-lMyQjAxMTIyNDMzMTkzNjEwWj.html?mod=wsj_valettop_email

For further insight into the implications, and one of the likely consequences of the delay of mark-to-market accounting watch a brief video-clip of a portion of Georgetown University Law Professor, Adam Levitin's U.S. Congressional testimony titled, Federal Regulators Don't Want to Know at:

The shadow inventory and bank REO's (not under current listing contracts) represent an historically significant supply of housing which in many ways is not transparent or adequately disclosed, and therefore is not fully-factored into the ‘market's pricing” of homes (supply and demand).